Consulting and Professional Services Agreements Basics
Many entrepreneurs provide consulting or professional services to customers in the business to business or consumer markets. This guide will show how good agreements can lead to satisfied customers and avoid disputes.
What Makes Consulting and Professional Services Engagements Unique?There are several unique aspects of consulting and professional services engagements:
- The parties do not always know at the outset the specifics of what is to be delivered. As an example, a business that contracts with a website developer does not know what the final website will look like. The details need to be worked out during the course of the engagement.
- The process of working out the details may require customer involvement in providing information and giving approvals.
-It is difficult to spell out the criteria which must be met for the services or deliverables to be acceptable.
-The professional or consultant typically knows much more about the options and their pros and cons than the customer. This can lead to mistrust, poor decision-making, and customer dissatisfaction.
Plan for the Phases of the Consulting EngagementConsulting or professional services agreements typically have several phases, including
-The needs and wants assessment
-Defining the specifics of the services or products to be delivered
-Developing or customizing the product or service to meet the customer's needs
-Implementing or delivering the product or service, and
-Providing ongoing support.
To provide proper incentives for performance, the parties should establish performance milestones, with applicable due dates, to which progress payments are tied. They also need to determine what intellectual property rights the customer will own in the deliverables.
Specify Applicable Compensation ArrangementsConsulting or professional services can be provided on a fixed fee, hourly, or contingent basis. if the engagement is to be for a fixed fee, the details and scope of what must be provided or delivered must be clearly stated so that the parties can determine if a customer request falls within the agreement or will be an additional charge. Procedures for change orders to modify the scope of work and applicable compensation should also be spelled out.
With hourly engagements, customers may request estimates or caps. The consultant needs to make the assumptions underlying the estimate or cap clear. Also, what is or is not billable needs to be clarified. Similarly, the agreement should spell out what expenses are billable, including materials, travel, lodging, printing, etc.
Termination ProvisionsThe parties also need to address whether the contract is terminable for convenience, which can be a good idea if they do not work together, the customer's financial situation changes, or the services are no longer needed. If termination for convenience is to be permitted, the parties need to specify whether any notice must be provided, what must be paid for, and what obligations the consultant has in transitioning the project to a new service provider.
The parties may also include a termination for cause provision. Typically, the service provider can terminate if the customer fails to make required payments. The grounds on which the customer might want to terminate for cause should be clearly spelled out. And again, questions as to what must be paid for, what rights the customer gets in the work product, and what if any ongoing obligations the customer has must be addressed.
Consulting and professional services engagements, and especially decisions to terminate, can lead to disputes. It can be helpful to have a standby mediator available to resolve these issues expeditiously, fairly and cost-effectively.